How Do You Refinance a Loan?


Quick Answer

Refinancing a loan is accomplished by contacting a bank or other lending company, filling out an application, and qualifying based on income and credit history, explains MortgageCalculator.org. The act of refinancing takes an original loan, pays it off, and creates a new loan with better terms and options.

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Full Answer

In order to refinance, a borrower needs to provide the original loan documentation and, in most cases, have a good credit history, notes MortgageCalculator.org. If approved, the refinancing company pays off the loan and sets up a new loan payable to their company. Some of the reasons people refinance is to reduce interest rates, extend the term length of the loan, or take cash out to pay for home improvements or fund other major expenses.

For example, if someone bought a house at the height of the market, interest may have been 9 percent. In later years, the interest rates could be much lower, at around 3 percent. That person could refinance and pay off the old loan principal and set up a new mortgage with current rates, which would save a lot of money over time, notes MortgageCalculator.org. Another example would be if someone had a hardship, such as getting laid off from their job after several years. Making mortgage payments with limited income could become difficult. They could utilize refinancing to extend their mortgage term and reduce their overall monthly payments.

Refinancing in order to fund major purchases is also very common, states MortgageCalculator.org. Imagine a homeowner with a roof that needs to be replaced, and then his air conditioning unit shuts down, and he doesn't have enough money to pay for both. If he refinanced, he could take some equity out of the house to fund these expenses.

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